A Billionaire’s Legendary Investor Playbook

In David Rubenstein’s new book, How To Invest: Masters On The Craft (Simon & Schuster, 2022), he openly admits in its introduction that he doesn’t consider himself a great investor. Rubenstein is an attorney who spent time in the Carter White House and started his Washington D.C.-based private equity firm in 1987 after he decided to give up law for something more lucrative. Despite his modesty, Rubenstein in a private equity titan who has amassed a net worth of more than $3 billion, largely because his buyout firm, which manages $375 billion in assets, has had a lot more winning investments than losers. Carlyle’s gross internal rate of return, before fees, has averaged 26% per year for more than 30 years.

Rubenstein’s book features his interviews with 23 great U.S.-based investors, ranging from value stock savant Seth Klarman to hedge fund god Ray Dalio, real estate star Jon Gray, infrastructure investor Adebayo Ogunlesi and macro trader turned crypto hodler Mike Novogratz. No fewer than 12 of them are billionaires, by Forbes reckoning, including James Simons, a genius mathematician, who gave up a career leading Stony Brook University’s math department to pioneer quantitative investing on Wall Street. For the past 30 years plus, his Medallion fund and its computer models have achieved net returns of 40% per annum and Simons has a net worth of $28 billion. While you shouldn’t expect specific strategies on how to ferret out or evaluate great stocks or funds, there is lots to be learned from the fascinating life and career journeys of these outstanding investors and the way they think about the world and markets in their pursuit of excess returns.

Forbes: Why did you want to write this book given all the books out there devoted to investing?

David Rubenstein: I’ve been in the investment world now for 35 years. The other books I’ve written haven’t really been about investment. People said to me, why don’t you do something about what you’ve done in the last 35 years? I wouldn’t say I’m a great investor, but I’ve been around the investment world. Second, there was a book written many years ago that I read when I was younger called The Money Masters, by John Train. (Originally published in 1980, the bestseller profiled nine great investors, including Warren Buffett, Benjamin Graham and John Templeton.) It was a really good book about the famous investors of that era. It wasn’t an interview book, but he did a pretty good job. So, I thought maybe something like that where you take the best investors and explain what they did. I’m not saying anybody’s going to be a great investor by reading my book, but it can give the average investor some ideas of what they shouldn’t or should do, and maybe inspire some young people going into investing. I am also trying to say that investors are doing a useful service for our country. If you allocate capital to Moderna, that’s a good thing. I was trying to say that investors are not just all greedy people making money. They actually do useful things for society.

Forbes: Given all the people you’ve interviewed and the people in your book, were there any in particular who impressed you the most in terms of their journey?

Rubenstein: A lot of them had journeys you couldn’t predict. Jim Simons for example, was a world class mathematician, but nobody thought he was an investor. Then he wound up, in fact, essentially inventing quantitative investing, Stan Druckenmiller was going to be a forester or something like that and he winds up trying to get an economics Ph.D. and he ultimately ends up as one of the best investors. It’s a great interview; I really admire him. There is a woman I interviewed who is now a chief investment officer at Rockefeller University, Paula Volent. She was an art conservator, and she went to business school to help her art conservation business and she wound up beating Yale’s David Swenson, a master in terms of rates of return (for endowments). So you just never can predict.

Forbes: Are there any great investors you came across that you feel like had a really unorthodox approach?

Rubenstein: Stan Druckenmiller has a very interesting perspective. He does macro. He also does stocks and then he sometimes shorts things and sometimes goes long. He kind of does whatever he likes or thinks is worth doing but then he likes to say, I can change my mind the next day. So he says, I don’t like to give advice to people because I can change my mind the next day and I don’t want to have people think I told them something. So he’s a smart guy, very introspective and very modest.

I think there’s a fair amount of modesty in all these guys because they’ve all made mistakes. They’ve all lost lots of money on deals and they get used to it. Being able to get over your mistakes pretty quickly is a sign of a good investor. Because otherwise if you linger on your mistakes you’re never going to get anywhere.

Forbes: Druckenmiller was the key investor for George Soros.

Rubenstein: He was the guy behind it. Absolutely. And that was when a billion dollars was a lot of money. He broke the bank of England and made a billion dollars. Then, of course, John Paulson (also featured in the book) made $20 billion. You may remember the financial crisis that was in the 1990s. That was the Long Term Capital Management, it was going to fall apart. The Treasury didn’t know what to do. That loss was a billion dollars. That’s how much they were talking about. Today it seems trivial.

Forbes: Are there any great investors who you wish you could have included in the book?

Rubenstein: There were five other people I couldn’t put into the book because of the page limitations–they are in the audio version of the book. One of them is Bill Ackman, who’s a very good investor. I did an interview, but I didn’t put it in the book, because I decided to make it only American investors. Another is Neil Shen, the guy who built Sequoia China into the greatest venture capital operation in China. He is just as spectacular.

Forbes: What are the attributes and the skills you found common in these great investors?

Rubenstein: Here’s what the great ones have in common: They came from blue-collar, middle-class families. They’re pretty well educated. They’re not high school dropouts. They have a pretty good facility for math. They have enormous intellectual curiosity. They really love to read as much as they can, even if it’s not about the area that they’re investing in. They are sponges for information. They like to make the final decision. They don’t want to delegate the decision and when they make a bad decision, they own up to it and get onto the next thing. They are also fairly philanthropic. Obviously not everybody who works in the investment world is rich because some people work in endowments, but if you’re in the business of making a lot of money and you do make a lot of money, they do tend to give away the bulk of it. They also have a fair amount of humility to them. Obviously there are always some arrogant people, but humble people are people that have made mistakes and these guys have all made mistakes. They recognize it.

Forbes: If you had to pick from among the types of the investment styles that you profile in the book, which would you favor?

Rubenstein: The safest are going to be value investors because value investors are not going to take highflyers. But I’d say if I could invest in any of these guys in the book–I think they’re all good–look what Sequoia has done in revolutionizing the venture world. It’s just phenomenal. And Stan Druckenmiller’s numbers are not known now, but he’s a spectacular person. If he took new money, he’d be great to give money to. Even Ron Baron who does mutual funds, which obviously the super cognoscenti of the investment world don’t look favorably on mutual funds, but he’s done pretty well for his investors.

Forbes: At Carlyle what have been your best investments and what lessons did you learn?

Rubenstein: We did an investment in China years ago, China Pacific Life, which was a company that was almost bankrupt. It was a life insurance company and we teamed up with some local partners and we turned it around; revolutionized the way they did things. And we made a very large return. We recently did a deal called Zoom Info, which is not Zoom. It’s a different kind of company and we made a very large sum on that. People told us not to do it. They said this Zoom Info was not going to get anywhere or China Pacific Life was not going to get anywhere. You have to be very skeptical of people who tell you not to do this or not to do that. You really have to examine it. Because again, as I said in the book, defying conventional wisdom is what makes great investors. You have to go against the grain and that’s what we’ve done sometimes at Carlyle.

Forbes: Is there an investment that you can recall?

Rubenstein: Plenty of them. We have a company called Carlyle Capital, which was more or less a bond fund, and we levered up, Ginnie Maes and Fannie Maes. But when the Great Recession came, the banks wouldn’t let you borrow against those securities that much yet and the government hadn’t yet guaranteed them. So, it went under.

The lesson was that just because somebody will lend 98 cents on the dollar doesn’t mean you should take it. In those days, you could get repo loans that refinance every day. Basically you could borrow 98 cents against government securities, but then at some point when the banks come along and say we’re nervous about these securities, we’re going to lend 90 cents on the dollar, then you have some challenges.

Forbes: Do you think the market is more risky now than it was when you started?

Rubenstein: I don’t know if the market is riskier, but I’d say the markets are always getting more sophisticated. The trick we have right now is we don’t really know if there’s going to be a recession and how deep it’s going to be. I wouldn’t say it’s riskier, but I’d say the stakes can be higher because people put more money at risk than they used to. In other words, the amount of money you can put to work out there, because the funds are so much bigger, is considerable. So, the old days you might put in a smaller amount of money. Today, the amount of money that’s available is just staggering.

Forbes: Do you have any comments on meme stock trading?

Rubenstein: What I say in my book is make sure you know what you’re doing. Read. A lot of the people that were doing some of these stocks were young people who really hadn’t read anything–they were just following a trend. And I think they weren’t as well informed as they probably should have been. The trick of being a good investor is to read and know what you’re doing. And a lot of times people just got in the markets and didn’t know what they were doing. They borrowed more money than they could afford. In any era, there are always going to be people who try to get rich quickly and it doesn’t happen.

Forbes: What do you hope investors will take away from reading your book?

Rubenstein: Here’s what I hope: If you are a young person and you’re thinking about a career in investing, I hope you’ll be inspired by the great investors and think maybe, while I can’t be Jim Simons, I might be pretty good at this if I do the things that I need to do–get educated, work hard and so forth. For the average investor who has $100,000-$200,000 to put out, I hope they’ll say I should probably go into a fund and not try to do stock picking myself. And then I list in the book things you should look for in a fund, such as track record. For people saying, no, I have enough money to pick stocks and I really want to put some time into it, I put some cautionary tales in there about what you really need to do. The most important thing is to read, know what you’re getting into, and don’t think you’re a genius because you’re good at making widgets. Just be realistic in your rate of return expectations.

The most important thing to recognize is that the biggest mistake people make is they sell when markets are going down and they buy when the markets are going up. Markets are going down now. They may go down a little bit more, but probably we’re close to the bottom. I think it’s probably a pretty good time to buy things that have reasonable business prospects. And certainly, if you’re interested in yield, the yields are going to be really high from dividend stocks now.

Forbes: Thanks, David.

Excerpted from October issue of Forbes Billionaire Investor, where you can invest alongside the world’s smartest billionaire investors.